Kentucky this year became the 14th state to pass a law establishing that general obligation bonds issued by municipal entities are secured by a statutory lien.
The law is credit positive for local governments, Moody's Investors Service said Wednesday.
“The validity of the legislation, however, won't be known until a federal bankruptcy court determines whether the lien rises to the level of a ‘statutory lien’ under the Bankruptcy Code, thus increasing the potential recovery rate for GO bondholders in a Kentucky municipal bankruptcy case,” said Moody’s analyst Ashley Staropoli.
Kentucky’s law still stands to give GO bondholders increased negotiating leverage in a municipal bankruptcy case, where most recoveries are the product of settlements, Staropoli said.
The statute attempts to add an extra layer of protection for bondholders and some lease pledges compared with other creditors, she said, adding that there is some evidence that a state statute confers secured status on a GO bondholder and prevents impairment.
In Central Falls, Rhode Island, which filed for Chapter 9 protection on Aug. 1, 2012 and exited 13 months later, the state enacted an emergency statute placing a lien on property taxes pledged to GO bondholders.
During bankruptcy proceedings, no creditor challenged Central Falls’ lien and GO bondholders received full and uninterrupted payment of debt service.
Under Kentucky's Senate Bill 192, when a local government pledges tax revenues for the payment of bonds and leases a lien arises automatically. While a court would have to determine if Kentucky's statute is a statutory lien, the fact that the statute invokes the term is a sign that the state intended to make GO bondholders secured creditors, Moody’s said.
“An additional benefit of the new law is clarification that a Kentucky local government's GO pledge is a pledge of taxes, further bolstering the argument that the GO pledge is a secured claim in a bankruptcy,” Staropoli said.
SB 192 appears to apply to all new and outstanding GO bonds and certain leases. It states “there shall be a statutory lien on the tax revenues pledged in favor of the holders of all bonds issued and leases entered into, effective by operation of law, that shall apply to all outstanding bonds…and leases payable from taxes” without priority of one bond or lease over another, regardless of when the bonds were issued or the lease was entered into.
The law also authorizes issuers to sell bonds with 40-year maturities to 40 years, up from 30 years.
SB 192 passed the senate unanimously Feb. 28, and by a vote of 98-1 in the House March 7.
Gov. Matt Bevin signed the bill March 19.
Bevin, a Republican, appears to have lost a second term in Tuesday’s election. Democrat Andy Beshear won the governor's seat by 5,188 votes, but Bevin claimed there were voting irregularities and has requested that local canvassing boards reprint voting machine totals.
Beshear, the state’s attorney general, is the son of former Gov. Steve Beshear.
